I.T.A. No.: 2680/Del/11
Assessment year: 2007-08
Page 1 of 11
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI A BENCH, NEW DELHI
[Coram: Pramod Kumar AM and C. M. Garg JM]
I.T.A. No.: 2680/Del/11
Assessment year: 2007-08
B S Sangwan .................. .Appellant
4, Harry Plaza, Atlas Road
Sonipat 131 001 [PAN: AAEFB9414C]
Vs.
Income Tax Officer
Ward 2, Sonipat ............... . ... Respondent
Appearances by:
Naveen C Gupta for the appellant
A Mishra, for the respondent
Date of concluding the hearing: 20 th January, 2015
Date of pronouncing the order: 21 st January, 2015
O R D E R
Per Pramod Kumar, AM:
1. By way of this appeal, the assessee appellant has challenged correctness
of the order dated 18 th March 2011 passed by the Commissioner of Income Tax,
Rohtak, under section 263 r.w.s. 143(3) of the Income Tax Act, 1961, for the
assessment year 2007-08.
2. One of the grievances raised in this appeal, as set out in the first ground
of appeal, is that the impugned order is contrary to the scheme of the law and
I.T.A. No.: 2680/Del/11
Assessment year: 2007-08
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the facts of this case. As it is a fundamental jurisdictional issue, we will take it
up first.
3. To adjudicate on this grievance, only a few material facts need to be taken
of. The assessee before us is a railway contractor and had filed his return of
income, for the assessment year before us, on 30 th April 2007 disclosing a
taxable income of Rs 4,92,380. This income tax return was subjected to the
scrutiny assessment proceedings, and, vide order dated 28 th November, 2008
passed under section 143(3) of the Act, the Assessing Officer assessed the at Rs
5,82,380. The matter, however, did not rest there. On 14 th February 2011,
learned Commissioner issued a show cause notice to the assessee which, inter
ala , pointed out following issues with respect to the assessment so completed
under section 143(3):
i. The assessee in his balance sheet has shown an amount of Rs
12,48,500 as work in progress whereas, in the profit and loss
account, this figure has been taken at Rs 8,85,000. Therefore,
the difference of these two figures, i.e. Rs 3,63,000, was not
added back by the AO.
ii. On perusal of the records, it is noticed that one of the partners
Shri Manoj Gupta has purchased a car in his name whereas
depreciation amounting to Rs 99,000 relating to this car has
been claimed as expenses of the firm. As the assessee firm is
not the owner of the vehicle, depreciation claimed at Rs 99,000
was not admissible, but was allowed by the AO.
iii. As per the P&L account, the assessee has incurred the
following expenses, which are liable to deduction of tax at
source, but no tax has been deducted:
a) Hire charges for vehicles/ machines Rs 15,78,500
I.T.A. No.: 2680/Del/11
Assessment year: 2007-08
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b) Professional charges Rs 36,000
c) Legal fees Rs 36,850
d) Loading of material Rs 62,82,650
Total Rs 79,37,250
Therefore, these expenses are not admissible as provided in
section 40(a)(ia) of the Income Tax Act, but the AO has allowed
the same.
iv. The assessee firm, as per balance sheet, has shown FDR and
securities receivable worth Rs 32,65,650 under the head
` Current Assets ' . The amount of FDR and security is to be
bifurcated as to interest on FDR and security amount for
closing balance/ work in progress may be verified but the
same was not done by the AO.
v. An amount of Rs 2,65,650 has been recorded as unsecured loan
from Shri N K Singhal in the balance sheet. Necessary
verification regarding identity, creditworthiness of Shri N K
Singhal and genuineness of transaction was not made by the
AO.
4. Having so set out the infirmities in the assessment order dated 28 th
November, 2008, learned Commissioner proceeded to issue the show cause
notice to the assessee requiring the assessee to show cause as to why the above
assessment order not be cancelled/ modified. On this aspect, he stated as
follows:
4. Keeping in view the above, the order passed under section
143(3) of the Income Tax Act, 1961, is considered to be erroneous in
so far as it is prejudicial to the interest of the revenue. Had the said
additions/ disallowances been made, there would have been
substantial tax effect and thus the cause of revenue has suffered.
Further, the order of the AO is in clear violation of the legal
I.T.A. No.: 2680/Del/11
Assessment year: 2007-08
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provisions as enumerated in the Income Tax Act, 1961. Thus, the
very sanctity of the Act has been eroded and may serve as a very bad
precedent. The same, therefore, needs to be cancelled/ modified.
5. With these observations, learned Commissioner required the assessee "to
show cause as to why an appropriate order under section 263 of the
Income Tax Act, 1961, be not passed ". The hearing on this show cause notice
was fixed for 24 th February 2011 which, after a couple of adjournments, finally
took place on 11 th March 2011. Learned counsel for the assessee elaborate
arguments on merits on each of the point set out in learned Commissioner ' s
show cause notice. So far point no. 1, with respect to work in progress, was
concerned, learned Commissioner rejected the explanation of the assessee " in
the absence of the corroborative evidence ". On point no. 2, learned
Commissioner dropped the proceedings. On point no. 3, i.e. with respect to
disallowance on account of not deducting TDS, learned Commissioner held that
" these expenses are not verifiable " and that "in the absence of complete
details, it is held that the assessee was liable to deduct tax at source but
failed to do so " , and, therefore, these expenses are disallowable under section
40(a)(ia). On point no. 4, learned Commissioner held that in the absence of
bifurcation of details of FDR and security, the interest income could not be
brought to tax but proceeded to hold that an amount of Rs 2,60,150, which was
deducted by the railway authorities, was a penal payment in nature and, as such,
did not constitute an admissible expenditure. Finally, in respect of point no. 5,
learned Commissioner held that since onus in respect of identity and
creditworthiness of Shri N K Singhal is not discharged and since genuineness is
not proved, " the assessment order is considered to be erroneous in so far as
it is prejudicial to the interest of the revenue to the extent of the amount of
addition of Rs 2,65,000 ". Yet, when it came to operative part of the impugned
order, learned Commissioner had a different tone altogether and he simply
restored the assessment order to the file of the Assessing Officer for fresh
I.T.A. No.: 2680/Del/11
Assessment year: 2007-08
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adjudication after making "proper enquiries " as was evident from the
following concluding paragraph:
In view of the above, it is clear that the AO has passed the order
without proper consideration of facts and without following the law
laid down by the legislature and without making requisite and
proper enquiries. As such the order passed by the AO is erroneous
and prejudicial to the interest of the revenue and is set aside to be
framed afresh after making proper enquiries. The AO is directed to
make fresh assessment in accordance with the law.
6. What thus started with a disapproval of the stand taken by the Assessing
Officer on merits, resulted in the assessment order being restored to the file of
the Assessing Officer for " fresh assessment in accordance with the law " and
" after making proper inquiries " . Be that as it may, the assessee is aggrieved
with the stand so taken by the Commissioner in the impugned order, and is in
appeal before us.
7. The fundamental question that really arises for our consideration is
whether such a change of heart is permissible under the scheme of law, and
whether a revision proceedings, which started with a show cause notice
condemning the action of the Assessing Officer on merits, can lawfully culminate
in the direction that the subject matter of revision proceedings be decided
afresh in accordance with law and after making proper inquiries.
8. We have heard the rival contentions, perused the material on record and
duly considered facts of the case in the light of the applicable legal position.
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Assessment year: 2007-08
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9. A co-ordinate bench of this Tribunal, in the case of Synergy
Entrepreneur Solutions Pvt Ltd Vs DCIT [(2011) 13 ITR Tribunal 377
(Mum)], had an occasion to deal with a somewhat similar situation. That case a
case in which in the show cause notice, learned Commissioner held that the loss
brought forward could not be set off against profits of the current year, but
when the Commissioner was to pass the final revision order, he simply held that
the matter is required to be examined afresh in accordance with the law. As to
whether such a shift in the stand was permissible, the coordinate bench,
speaking through one of us and following the esteemed views of Delhi F bench
of this Tribunal in the case of Maxpak Investments Ltd Vs ACIT [(2207) 13
SOT 67 (Del)] articulated through legendary Hon ' ble Vice President Easwar (as
he then was; later Hon ' ble Justice Easwar), held as follows:
...... . A plain reading of the impugned revision order clearly shows that the
conclusions drawn in the revision proceedings are different from the
reasons for revision proceedings set out in the show-cause notice -- extracts
from which are set out in the revision order itself. It is important to note the
shifting stand of the CIT so far as reasons for subjecting the assessment
order to revision proceedings. At p. 1, in fifth sentence of the impugned
revision order, learned CIT notes that that "on perusal of assessment record,
it was noticed that assessment order was erroneous in as much as it was
prejudicial to the interest of the Revenue as the details of purchase and sale
of share transactions in futures were not verified as to whether the profit or
loss from the futures trading amounts to speculation gain or loss". The
extracts from show-cause notice, which have been reproduced in the
impugned revision order at pp. 1 and 2, do not, however, even remotely
support that stand. The stand taken in the show-cause notice is that, on
merits, set off is not permissible in as much as show-cause notice states that
"as per the provisions of s. 73 of the IT Act, any loss computed in respect of
speculation business carried on by the assessee shall not be set off except
against profits and gains of another speculation business", and, "therefore
you (the assessee) are not allowed to adjust the speculation loss". The show-
cause notice, therefore, clearly refers to declining what the CIT perceives as
a set off of speculation loss against business profits. That is a categorical
disentitlement of set off. In the final conclusions in the impugned revision
order, however, the CIT once again deviates from the stand so taken and
concludes as follows:
I.T.A. No.: 2680/Del/11
Assessment year: 2007-08
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"In view of the foregoing, the assessment order dt. 27th Dec., 2007
passed by the AO is considered to be erroneous and prejudicial to the
interests of the Revenue. Since the AO has not taken the necessary
details to verify whether the profits and loss from futures trading
amounts to speculation profits or loss, the assessment order is set
aside with a direction to obtain complete details and conduct
necessary enquiries and examine the same for the assessment year
under consideration. The AO shall provide adequate opportunity to
the assessee before passing the assessment order."
5. It is thus clear that there has been shift in the stand of the CIT on whether
it was a fit case for revision on the ground that the assessee was not eligible
for set off of losses on speculative transactions or whether it was a case for
revision on the ground that the AO did not make necessary verifications
about the transactions. The reason given in the show-cause notice is former,
while the reason for which revision powers are finally exercised in the
impugned order are latter. As to whether such an exercise of revisional
powers, on the grounds other than the grounds of revision as set out in the
show-cause notice, could be held to be sustainable in law, we find guidance
from the decisions of a Co-ordinate Bench in the case of Maxpak Investment
Ltd. vs. Asstt. CIT (2006) 104 TTJ (Del) 881 : (2007) 13 SOT 67 (Del) which,
inter alia, observes as follows:
" ............ .In CIT vs. G.K. Kabra (1995) 125 CTR (AP) 55 : (1995) 211 ITR
336 (AP) the Andhra Pradesh High Court was dealing with an
application seeking reference under s. 256(2), inter alia of the
following question :
` Whether, on the facts and in the circumstances of the case, the
Tribunal was correct in holding that the CIT lacks initial
jurisdiction, particularly when the conclusion made by the CIT
in the order under s. 263 was on the basis of the information
furnished in response to the initial notice ?'
While declining to refer the above question, the High Court held as
under (pp. 339-340) :
` The necessary implication in the expression ` after giving
opportunity of being heard ' relates to the point on which the
CIT considers the order to be erroneous and prejudicial to the
interests of the Revenue. In other words, it is necessary for the
Commissioner to point out the exact error in the order which
he proposes to revise so that the assessee would have an
I.T.A. No.: 2680/Del/11
Assessment year: 2007-08
Page 8 of 11
adequate opportunity of meeting the error before the final
order is made. '
(Emphasis, italicsed in print, supplied)
In the case before the High Court, the show-cause notice
referred to two issues to which the assessee had given
satisfactory replies. No action was taken under s. 263 in
respect of these two issues. However, in the said order the CIT
mentioned the hire charges as the ground for revising the
assessment. This point had not been mentioned as a ground in
the show-cause notice. The High Court held that ` in as much as
the CIT had not chosen to show these two points as the errors
in making the final order and the final order under s. 263
refers only to the inference of hire charges being exigible to tax
which was not mentioned at all in the show-cause, obviously
the assessee had no opportunity to meet that point."
(Emphasis, italicsed in print, supplied)
10. The ratio of the decision, clear from the above observation, is that
if a ground of revision is not mentioned in the show-cause notice
issued under s. 263, that ground cannot be made the basis of the
order passed under the section, for the simple reason that the
assessee would have had no opportunity to meet the point. ................
11. The other judgment which supports the case of the assessee is that
of the Punjab & Haryana High Court in CIT vs. Jagadhri Electric
Supply & Industrial Co. (1983) 140 ITR 490 (P&H). The nature of the
jurisdiction of the CIT under s. 263 and the powers of the Tribunal
while dealing with an appeal against the order passed under that
section were explained in that decision. The CIT had found the order
of the AO allowing continuation of registration to the assessee-firm to
be erroneous on the ground that the actual distribution of the profits
was different from the ratio mentioned in the deed of partnership.
The Tribunal set aside the order of the CIT but while doing so
observed that there was a change in the number of partners from 10
to 11 which fact had not been taken into account by the AO when he
granted registration for the firm for the asst. yr. 1966-67 and thus
the grant of registration was erroneous. On the basis of this
observation it was argued before the High Court on behalf of the
Revenue that the Tribunal ought to have sustained the order of the
CIT on that ground. Repelling the contention, it was held by the High
Court as under (pp. 502-3):
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Assessment year: 2007-08
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` The jurisdiction vested in the CIT under s. 263(1) of the Act is
of a special nature or, in other words, the CIT has the exclusive
jurisdiction under the Act to revise the order of the ITO if he
considers that any order passed by him was erroneous insofar
as it was prejudicial to the interests of the Revenue. Before
doing so, he is also required to give an opportunity of being
heard to the assessee. If after hearing the assessee in
pursuance of the notice issued by him under s. 263(1) of the
Act, he is not satisfied, he may pass the necessary orders. Of
course, the order thus passed will contain the grounds for
holding the order of the ITO to be erroneous, as contemplated
under s. 263(1) of the Act. . . . The Tribunal cannot uphold the
order of the CIT on any other ground which, in its opinion, was
available to the CIT as well. If the Tribunal is allowed to find
out the ground available to the CIT to pass an order under s.
263(1) of the Act, then it will amount to a sharing of the
exclusive jurisdiction vested in the CIT, which is not warranted
under the Act. It is all the more so, because the Revenue has not
been given any right of appeal under the Act against an order
of the CIT under s. 263(1) of the Act. . . . Under s. 263 of the Act
it is only the CIT who has been authorized to proceed in the
matter and, therefore, it is his satisfaction according to which
he may pass necessary orders thereunder in accordance with
law. If the grounds which were available to him at the time of
the passing of the order do not find a mention in his order
appealed against, then it will be deemed that he rejected those
grounds for the purpose of any action under s. 263(1) of the
Act. In this situation, the Tribunal, while hearing an appeal
filed by the assessee, cannot substitute the grounds which the
CIT himself did not think proper to form the basis of his order. '
We respectfully understand this judgment as holding, by necessary
implication, that if the CIT has not mentioned the ground on which action is
proposed to be taken under s. 263 in the show-cause notice, it is deemed that
he was not satisfied that it was a fit ground for taking action under the
section, with the result that the final order, if based on the ground which he
had earlier considered not fit for taking action under the section, will have
to be set aside as not based on any ground which may justify his belief that
the order passed by the AO was erroneous insofar as it is prejudicial to the
interests of the Revenue. ..................... ."
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Assessment year: 2007-08
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10. We are in considered agreement with the views so expressed by the
coordinate benches and we adopt these views. When we examine the facts of
this case in the light of the legal position so set out, we find that in the
impugned revision proceedings, learned Commissioner started by pointing out,
what he saw as, glaring illegalities in the assessment order, which was subjected
to revision proceedings, but what he concluded was that the said assessment
order was passed without making " proper requisite and desired inquires ".
What the assessee was required to demonstrate the incorrectness of the learned
Commissioner ' s stand to the effect that, because of the five additions/
disallowances, as set out in paragraph 3, not having been made, the order is
erroneous and prejudicial to the interest of the assessee. Learned Commissioner
proceeded to observe that "Had the said additions/ disallowances been
made, there would have been substantial tax effect and thus the cause of
revenue has suffered. Further, the order of the AO is in clear violation of
the legal provisions as enumerated in the Income Tax Act, 1961. Thus, the
very sanctity of the Act has been eroded and may serve as a very bad
precedent " . Yet, finally he revised the order for want of " proper requisite and
desired inquires " and thus shifted the goalpost. That' s not permissible under
the scheme of the law, as a revision order can only be passed on the ground on
which the assessee has been given reasonable opportunity of being heard, and
as it is not open to Commissioner to set out one reason for revising the order
but actually revise the order on some other ground. In our humble
understanding, lack of proper inquiries, which an Assessing Officer ought to
have conducted on the facts of the said case, is altogether a different reason
from inadmissibility of a claim of deduction or an income which ought to have
been brought to tax. In view of the above discussions, as also bearing in mind
entirety of the case, we are of the considered view that the impugned revision
order is contrary to the scheme of law, and should be quashed for this reason
alone. As we have quashed the impugned revision order, on this technical
ground, we see no reasons to address ourselves to the merits of the case as
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Assessment year: 2007-08
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raised in the other ground of appeal. All those issues are academic in the
present context.
11. In the result, the appeal is allowed in the terms, and for the reasons, set
out above. Pronounced in the open court today on 21 st day of January, 2015
Sd/- Sd/-
C M Garg Pramod Kumar
(Judicial Member) (Accountant Member)
New Delhi, the 21 st day of January, 2015.
Copies to: (1) The appellant (2) The respondent
(3) Commissioner (4) CIT(A)
(5) Departmental Representative
(6) Guard File
By order etc
Assistant Registrar
Income Tax Appellate Tribunal
Delhi benches, New Delhi